Valuation of Intangible Assets as per AASB 138

Discuss about the Ebony & Associates Public Accounting for AASB 116.

I hereby make reference to an email as well as telephone conversation done to me on March 13th, 2018 regarding accounting issues presented in the financial reporting that seemed contrary to your expectation.

The first tier in line is the valuation of assets which is explained in AASB 116 paragraph 15 that all assets are either tangible or intangible depending on its characteristics. Intangible asset as explained in AASB 138 is said to entail financial assets that are not felt, touched or even seen, the likes of trademarks, patents, lease and deferred taxes. Paragraph 21 of AASB 138 further explains that these assets like any other asset is recognized and measured as per the asset economic life and its initial cost respectively. However recognition only takes place upon measuring the cost of the asset reliably. Similarly to other assets, intangible losses value through impairment or amortization means. Amortization and impairment reduces the value of the asset from the initial cost of measurement to net book value. This value loss is accounted for in the profit or loss account and its presentation accounted for in the notes for disclosure. 

Tangible assets like Property Plant and Equipment should be valued at historical cost or rather at purchase value. Historical cost as per AASB 116 paragraph 16 entails all costs relating to bringing the asset in existence Correia(2018.Pg 50.) For instance, all costs incurred in purchasing assets and those which directly relate to movement and location of the asset so as to be in operation. Ideally, the cost of an item in paragraph 23 of AASB 116 is the cash price spent in acquisition on the day the asset was recognized as an asset of the firm.

Before consideration of any other factor during measurement of an asset, the base pace is which is the historical value per say has to be accounted for as done in Muppet Ltd PPE items presentation. Whereby $450000 is reported to form the base in which the factor  value decrease of the asset is factored from. Both AASB 116 and IAS 16 requires that recognition of all asset at the initial point of acquisition be done at cost as done to all assets reported in the financial statements of Muppets Ltd before considering other factors.

The consideration of balances of assets that appeared in previous year financial statement i.e. purchase cost of PPE and its accumulated depreciation is as per regulations AASB 116 paragraph 30 that require all asset be carried at it cost less any accumulated depreciation. Muppets Ltd assets have been accounted as expected because the historical factor is considered as well as the loss of value factor so as to get the face net book value of the asset.

Valuation of Tangible Assets as per AASB 116

Historical cost of for example the PPE item of 450000 Australian dollars is what was spent acquires the asset hence on yearly basis just the value loss due to the operation is what should be reducing its value. The value loss depends on the method applicable depending on economic life the item is expected to last by either reducing balance method or straight-line method as per the depreciation rates applicable. This accumulated depreciation is a sum up of yearly depreciation value of asset since it was purchased.

For example, since Muppets asset had a useful life of 9 years and the asset has been in operation for 3 years hence annual depreciation figure was Brett(2018.Pg 4);

=450000/9=50000, thus on annual basis the asset depreciates at 50000, hence

1st year=50000, 2nd year 50000 and the reporting 3rd year 50000 totaling to =150000 reduce in value, what is factored in the books as explained in the notes on PPE. By factoring the 150000 Australian Dollar depreciation value directly from the historical purchase cost=450000-150000=300000 is as similar as;=450000 less depreciation cost 50000for 1st year to get the net book value as at end first year=400000,then this form balance value as at 2nd year=400000 less depreciation for 2nd year=400000-50000=350000, then factoring the depreciable value of the 3rd year=350000-50000=300000 thus giving us the net effect of 300000 as reported in the books. Therefore, I cordially request the Muppet Ltd accounting team to have no doubt at all on how the assets have been accounted for in its books of account.

The conclusion by the directors that the asset cannot be sold for more than 200000 is there idea which means they are after disposing the asset at a loss. This is because having considered the value loss of the asset the net book value of 300000 is the base factor for making the loss or gains whereby if you go up you gain and if low you loss as is in the case of the directors thinking. If the asset is to be disposed at 300000 this means no loss no gain is earned thus disposal done at breakeven. I am hereby informing the directors that the asset can be sold a price higher than the 200000 they claim because it is far below the base net book value of 300000.

Gain on disposal can be achieved by selling this item more than 300000 for instance if we do the disposal at 320000 then there is a gain of =320000-300000=20000 whereas if we do a disposal at a lower figure of 200000 as concluded by the Directors we will be losing=20000-300000=-100000 and finally if we do at 300000 we will be at break-even point=300000-300000=0. Finally, on this asset issue, I wish to inform the production manager that however perfects an asset is in operation as long as one day has elapsed from the day of acquisition the asset is eligible and loses value as soon as its operation starts. The production manager should likewise know that even if the asset is new at the bazaar or workshop it losses value though its economic life is still intact. Therefore the loss of value in an asset is a norm we cannot control and it happens as either impairment or amortization to intangible asset and depreciation to the tangible asset like in this case of PPE Craswell (2017.Pg 170.)

Directors’ Conclusion on Sale of an Asset

Revaluation and devaluation of asset is made only upon recognition of the asset with its carrying amount increasing or decreasing consecutively thus allowing the increase or decrease be accounted for as revaluation surplus or deficit in the profit or loss and comprehensive income with its value base accounted for in the statement of changes in equity as well as statement of financial position. Alternatively all disclosure regarding the asset valuation, recognition and measurement are disclosed in our notes item wise hence from our perspective full disclosure of even tax on revaluation surpluses have been accounted for as per AASB 112 and that of AASB 116 paragraph 73.

The difference between income and profit tax reported is correct and in compliance with AASB 1020. This is because the items involved while preparing the profit or loss and those involved in calculating income tax paid are totally different whereby in most cases you find most of these items affect the income tax and not the profit part. Mostly this difference as per AASB 1020.09(a & b) is referred to as ‘’permanent difference’’ and from it that’s why the explanation of difference exist, for instance, there are expenses and revenue that are factored in accounting for profit or loss but not income whereas on the other hand there those deductions that are assessed for allowable in the income tax portion but not in the profit or loss account Demski (2017.Pg 5)

Ideally, the difference is acceptable because the tax code in Australia permits the company to report higher accounting profit for purposes of demonstrating on how investment fair but with a decrease in taxable income Tran(2015.Pg 568). This same Australian Tax Office allows the profit be reduced via utilization of tax guidelines that controls tax avoidance Lietz (2013.Pg 11.)

There are two major items that are said to cause the difference between income tax and profitable tax value for Muppet Ltd as stipulated in AASB 1020.50. These items are timing difference and permanent difference aspect whereby the permanent difference is seen to change the incidence portion of the income of tax in lieu of the pre-tax accounting profit within the period in check a good example is non-allowable depreciation and impairment value on assets. On the other hand timing difference resulting from revenue determined in the pre-tax profit but not included in the taxable income an example being gross margins on piecemeal sales but only recording done for tax purposes when the full amount is receipted Branson(2012.Pg 296.)

There are revenue items that are reported on taxable income but not accounted for in profit pretax part because of time difference the likes of advance receipts done like insurance, rents, and interest plus dividends. This difference on these items will only be captured upon recognition and realization of this item. Similarly to this is the expense deducted from profit tax portion before they are factored in the income taxes the likes of warranties, leave provision expenses and other provisions as per AASB 112.

Generally the aforesaid issues are the major causes of this difference and its disclosure ought to be disclosed as done in the notes of the Muppet Ltd financial statements together with the first issue on asset valuation hence urge the accounts team and the entire Muppet Ltd office to relax and relieve doubt because the financial statements are in order. 

Yours Sincere,

Lyrial Ellen.

Reference:

Australian Accounting Standards Board, 2009. AASB 116 property, plant and equipment.

Branson, Christopher C. “Reportable tax positions: A recent innovation by the ATO.” Taxation in Australia 46, no. 7 (2012): 296.

Brett, T., 2018. Determining the Useful Life of Infrastructure Assets.

Correia, M., Kang, J. and Richardson, S., 2018. Asset volatility. Review of Accounting Studies, 23(1), pp.37-94.

Craswell, A., 2016. GROUP ACCOUNTS. Transnational Accounting, p.170.

Demski, J.S., 2017. Accounting and economics. The new Palgrave dictionary of economics, pp.1-6.

Lietz, G., 2013. Determinants and consequences of corporate tax avoidance.

Tran, A., 2015. Can Taxable Income Be Estimated from Financial Reports of Listed Companies in Australia. Austl. Tax F., 30, p.569.

Walker, J. and Zimmer, I., Asset Revaluation Accounting. Wiley Encyclopedia of Management.

Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.